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What is CVP analysis The importance of CVP to use in decision making Break-Even point ( BEP) Contribution Margin (CM) Contribution Margin Ratio (CMR) Target Profit Safety Margin CVP Analysis with single Product What Is Sales Mix CVP Analysis with Multiple Products Assumptions of CVP Analysis Limitation of CVP
evolve the total revenues, the total costs and operating profit, as changes occur in volume production, sale price, the unit variable cost and / or fixed costs of a product.
zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost . This concept is further explained by the following equation: [Break even sales = fixed cost + variable cost]
TR-TC=Profit TR-TC=0 Where: Q= output and P=price if: (Q*P)-TFC-(Q*UVC)=0 (Q*P)-(Q*UVC)-TFC=0 Q(P-UVC)=TFC Q=TFC/P-UVC
Assumption of (BEP)
The Break-even Analysis depends on three key
assumptions: Average per-unit sales price (per-unit revenue) Average per-unit cost Monthly fixed costs
equation method
The format of this method can be expressed in equation form as follows:
[Profit = (Sales Variable expenses) Fixed expenses]
Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis:
[Sales = Variable expenses + Fixed expenses + Profit]
Q = 350 Units
Contribution Margin
The contribution margin is total revenue minus total
variable costs. Similarly, the contribution margin per unit is the selling price per unit minus the variable cost per unit. Both contribution margin and contribution margin per unit are valuable tools when considering the effects of volume on profit. Contribution margin per unit tells us how much revenue from each unit sold can be applied toward fixed costs. Once enough units have been sold to cover all fixed costs, then the contribution margin per unit from all remaining sales becomes profit.
[Contribution Margin = Sales revenue Variable cost ] CM=P-VC
Note:
For each additional product X sold, the company will generate $400 in contribution margin.
the contribution margin will be affected by a change in total sales. To illustrate notice that in our example has a CM ratio of 40%. This means that for each dollar increase in sales, total contribution margin will increase by 40 cents ($1 sales CM ratio of 40%). Net operating income will also increase by 40 cents, assuming that fixed cost do not change.
Total Sales : (400 units) X $ 400,000 Less: variable expenses 240,000 Contribution margin $ 160,000 Less: fixed expenses 160,000 Net income $ -
400,000
300,000
200,000
100,000 100 200 300 400 500 600 700
Units Sold
Q= FC + Target Profit/UCM
sales over the break even volume of sales. It stats the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even.
Formula:
[Margin of Safety = Total budgeted or actual sales Break even sales] The margin of safety can also be expressed in percentage form. [MOS = Margin of safety in dollars / Total budgeted or actual sales]
The company has a BEP of $400,000. If actual sales are $1000,000 the
The term sale mix refers to the relative proportion in which a company's products are sold. The concept is to achieve the combination, that will yield the greatest amount of profits. Most companies have many products, and often these products are not equally profitable. Hence, profits will depend to some extent on the company's sales mix. Profits will be greater if high margin rather than low margin items make up a relatively large proportion of total sales.
analysis is somewhat more complex .The reason is that the different products will have different selling prices, different costs, and different contribution margins. Consequently, the break even point will depend on the mix in which the various products are sold.
Product 102
BEP=total FC/WAUCM UVC(X)=22,000+15,000+26,000/12,000=5.25 UVC(Y)= 32,000+ 12,000+34,000/8,000=9.75 UCM= P-UVC UCM(X)= 34-5.25 =28.75 UCM(Y)=40-9.75 =30.25 12,000+8000=20,000 WAUCM =UCM* % of total 12,000/20,000= 0.6 WAUCM(X)= 28.75*60%=17.25 8,000/20,000= 0.4 WAUCM(Y)=30.25*40%= 12.1 total of sales mix 29.35
BEP=48,000/ 29.35=1635.5 X=1635.5 *0.6= 981 units Y=1635.5 *0.4= 654 units
(2) Units to be sold to obtain $3o,ooo? BEP=total FC+P/WAUCM BEP=48,000+ 30,000/ 29.35=2,657 X=2,675*0.6=1,605 units Y=2,675*0.4=1070 units
be analysed into their fixed and variable elements. 2 . Fixed costs remain fixed even over a wide range of activity. 3. Variable costs always vary directly with activity. 4. Selling prices are constant per unit. 5 . Only levels of activity affect costs and revenues 6. usually only one product can be effectively dealt with 7. Uncertainty does not exist.
analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs are variable. For longerterm analysis that considers the entire life-cycle of a product, one therefore often prefers activity-based costing or throughput accounting.
references
GABRIELA BUAN, IONELA-CLAUDIA DINA, USING COST-VOLUME-PROFIT ANALYSIS IN DECISION MAKING, Annals of the University of Petroani, Economics, 9(3), 2009, 103-106 www.wiley.com/college/sc/eldenburg/ch03.pdf http://www.accountingformanagement.com/cost_volume_profit.htm http://www.entrepreneur.com/tradejournals/article/173229705.html
http://www.accountingformanagement.com/Break_even_analysis.htm
http://www.accountingformanagement.com/contribution_margin_definition.htm http://www.accountingformanagement.com/contribution_margin_ratio.htm faculty.lebow.drexel.edu/KlineS/Acct601/Chap008.ppt http://www.accountingformanagement.com/concept_of_sales_mix.htm
http://business.fortunecity.com/discount/29/cvpassweb.html, Cost Volume Profit Analysis: Its Assumptions and Their Pitfalls , by: Duncan Williamson
http://en.wikipedia.org/wiki/Cost-Volume-Profit_Analysis
Thank you for pay attention Presented by : Meytham Poormolla Khalid Malik Barnabas Eze